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Dispersion of beliefs, ambiguity, and the cross-section of stock returns

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  • Lee, Deok-Hyeon
  • Min, Byoung-Kyu
  • Kim, Tong Suk

Abstract

We examine whether ambiguity is priced in the cross-section of expected stock returns. Using the cross-sectional dispersion in real-time forecasts of real GDP growth as a measure for ambiguity, we find that high ambiguity beta stocks earn lower future returns relative to low ambiguity beta stocks. This negative predictive relation between the ambiguity beta and future returns is consistent with theory, which predicts the marginal utility of consumption to rise when ambiguity is high. We further show that the ambiguity premium remains significant after controlling for exposures to expected real GDP growth, VIX, and financial market dislocations index.

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  • Lee, Deok-Hyeon & Min, Byoung-Kyu & Kim, Tong Suk, 2019. "Dispersion of beliefs, ambiguity, and the cross-section of stock returns," Journal of Empirical Finance, Elsevier, vol. 50(C), pages 43-56.
    • Handle: RePEc:eee:empfin:v:50:y:2019:i:c:p:43-56
    DOI: 10.1016/j.jempfin.2019.01.001
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    More about this item

    Keywords

    Ambiguity; Dispersion of beliefs; Cross-section of stock returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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